FX Providers’ Biggest Secrets Finally Revealed: Part Two

Regular readers will be aware of the vast sums SMEs lose to FX providers on currency exchanges and international payments (£4.1bn a year at last count). In the second of a three-part series, we’re looking at some of the methods less scrupulous providers use to furtively gouge money from their customers. (Click here for part one).

A lack of regulation of the FX industry allows currency providers to deliberately obfuscate their terms and conditions and disguise hidden fees amid the complex mechanisms of their transactions.

We want FX customers to be more informed about the dangers they face. This is not an entirely selfless act. As businesses and individuals become more knowledgeable about the realities of the FX industry, we feel confident they will recognise the advantages of signing up with a provider that offers the simple, transparent proposition of a fixed 0.2% fee at a highly competitive rate – no mind games, no hidden fees and no fuss. (That’s us, by the way).

Without further ado, here are another three sneaky tactics you should keep an eye out for:

4. Limit Orders.
A client might want to set a limit order stipulating that the broker buys a certain amount of currency at a certain price; the broker can take advantage of this to make a profit.

So, for example, if the market is sitting at 1.1400, a broker might persuade their client that the price will drop when the broker actually believes it will rise. As a result, the client sets what they believe to be a realistic and achievable limit to buy €100k at 1.145, when in reality they could benefit by aiming for 1.16+.

However, when economic data is released that causes the market to jump favourably, a particularly devious broker will ‘ride the order’, sitting on it before securing the client’s rate in order to make the most out of the price increase, waiting until the market hits the top level so they can pocket the difference between its highest point and the client’s price.

Clients who are aware of the rate increase will often call their provider to set their limit order at a higher rate (which can be Good Till Cancelled, or One Cancels Other), only for the broker to innocently claim “Sorry! We’ve already locked your rate in at 1.145, I’ll send your trade confirmation over now.”

N.B. you run the risk of your limit orders being exploited if you use unregulated providers.

5. Cold calling
FX providers love a cold call, and become particularly frenetic exponents of this method of generating business in the period leading up to large data releases liable to create market volatility. So – picking two recent examples entirely at random – brokers would have been frantically dialling in the run-ups to the Brexit result and Trump’s election, knowing full well that they could stoke up fear of an uncertain market to talk clients into locking in an inflated price before the data release. Exploiting fear to make people act a certain way… now where have we heard that before?

6. Forward contracts
Much like the previous example, this one too is predicated on generating fear. It’s common practice for FX providers to ask clients about their total exposure for the year, but some will try to scare the client into believing that the exchange rate will move unfavourably on the back of a big economic data release. The client secures their entire amount of exposure for that period but on a wider spread (allowing the provider to eke extra profit from the client, above the level required to counteract risk) and cost to them overall, and potentially misses out on being able to secure a better rate down the line.

To be clear, we know that not all FX providers are guilty of these practices, but we also know that they do occur. To be even clearer, we guarantee that you will experience precisely none of them with freemarket.

Tune in tomorrow to find out how some providers will invoke the mid-market rate and offer disingenuous advice to steer you towards a decision that benefits only them.

James is freemarket’s Chief Commercial Officer. He has a history of finding new ways to solve age-old financial challenges and was responsible for launching some of the first online money transfer and prepaid card initiatives in Europe.